Euro zone inflation hits record as ECB hawks push for a hike

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Eurozone inflation accelerated to a new all-time high, strengthening the case for the European Central Bank to consider a big interest rate hike when it meets next week.

Consumer prices in the 19-member currency bloc jumped 9.1 percent from a year earlier in August, beating the average estimate of 9 percent in a Bloomberg survey of economists led by energy and food.

Stripping out those drivers, a measure of core inflation rose to a new high of 4.3%, underscoring how price pressures continue to widen.

The question now is whether the data is enough to push the ECB toward the 75 basis point interest rate hike that some on its 25-member Governing Council want discussed. It’s a hike that has already been used twice by the Federal Reserve, although dour ECB officials have warned against following suit as Europe braces for recession.

The fastest rise in prices since the euro was introduced more than two decades ago has policymakers in Frankfurt seeking a delicate balance: Interest rates must be raised enough to steer inflation back to the 2% target, but not so much that stifled any economic momentum remains amid fears of Russian energy shutdowns this winter.

Tuesday’s numbers may face further scrutiny after officials, including Executive Board member Isabelle Schnabel, said the ECB should focus more on inflation results than forecasts as the war in Ukraine complicates forecasting.

What Bloomberg Economics Says

“Following Schnabel’s hawkish speech and amid calls for excessive rate hikes from other members of the Governing Council, August’s upside inflation surprise adds to the possibility of a 75 basis point rate hike as soon as next week’s meeting.”

–Maeva Cousin, Senior Economist for the Eurozone. Click here for full commentary

But while Russia’s invasion was certainly behind the spike in energy prices, Dutch central bank chief Claas Knott said on Tuesday that strong consumer demand since the end of the lockdown had also pushed prices up. Rising wages and a weak euro pose upside risks, he warned, calling for a “quick” normalization of monetary policy.

“There is an urgent need for the Governing Council to act decisively at its next meeting to fight inflation,” Bundesbank chief Joachim Nagel said after Wednesday’s data. “We need a strong rate hike in September.” And further interest rate moves are expected in the coming months.”

Six members of the Governing Council have said publicly that they believe a rate change of more than 50 basis points should be discussed, with money markets putting the probability of 75 basis points at more than 60%. After Wednesday’s data, investors kept bets on 166 basis points for year-end tightening.

Other officials called for more restraint. Chief Economist Philip Lane this week called for a “steady pace” of interest rate hikes to minimize the risk of disruptions, while Executive Council member Fabio Panetta said a weaker economy would help moderate inflation.

Economists are increasingly predicting a recession in the eurozone in the coming quarters as rising living costs erode demand, undermining the pandemic recovery. The ECB will shed some light on the outlook with a new set of forecasts at its meeting on September 7-8.

Governments are trying to offset the energy price shock through a myriad of measures, including tax cuts, direct payments to households and subsidies to companies. In total, they spent about 280 billion euros ($279 billion), according to the Bruegel think tank in Brussels.

More help may be coming: The European Commission said this week that it also plans to take urgent steps to tackle skyrocketing electricity prices. Although that sent market prices tumbling, Russia halted gas flows through a key pipeline on Wednesday for temporary maintenance.

(Updates with the head of the Bundesbank in the eighth paragraph.)

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